How do you calculate Taxes for a rental?

Question

Let's say your W2 salary job (easy math) is $200,000/yr

If your rental investment for the first year is negative $25k, are you getting taxed on $175k? ($200k - $25k)

The reason it's negative is due to 3.5% depreciation, mortgage interest, property taxes, realtor fees (half a month's rent), homeowners insurance, fixes/costs around the home, etc.

Michael Plaks · Answer

First - some of what you listed may not be immediately deductible, such as capital improvements, while depreciation may be improved if there is room for deductions. Which brings us to the second:

Second: rental losses do not normally offset a $200k salary. There're some exceptions, such as your spouse qualifying as real estate professional (REPS) or your properties being short-term rentals (STRs). Both come with their own restrictions.

When your rental losses are not currently available (95% chance), they are reserved for the future moment of selling this property. Again, with various small print involved.

Natalie Kolodij · Answer

As mentioned there is a lot more to it than this.

Rentals are typically passive- Passive losses are subject to passive loss limitations.

So once your AGI is over $100k you can only use limited amounts of those losses against your W2 or other income that year; and once over $150k you can't use any amount of those losses against other income that year.

Those losses do carry forward and will offset other passive income; or be utilized when your income drops below the limitations; or when the passive activity is sold.

The exceptions to this are if a rental is Non-Passive.

This occurs when someone qualifies as a Real Estate Professional or when there is a short-term rental which you materially participate in.

Nicholas L. · Answer

@Bob Asad

it's more complicated than that because 1. passive losses are phased out above $100K (and suspended) and 2. it will depend on your overall tax situation

so it's a great question for your CPA

my rentals do help me with passive losses

How do you calculate Taxes for a rental?

How do you calculate Taxes for a rental?

Most Popular Reply

3 Replies